1 © Copyright Doug Hillman 2000 Business Consolidations.

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Presentation transcript:

1 © Copyright Doug Hillman 2000 Business Consolidations

2 © Copyright Doug Hillman 2000 Parent/Subsidiary l When investor owns more than 50% of voting stock of another company, assume ability to control l Investor company is parent l Investee company is subsidiary

3 © Copyright Doug Hillman 2000 Consolidated Financial Statements l Parent and subsidiary may be separate legal entities l For reporting, view as single economic entity l Consolidated financial statements show financial position and operating results of combined companies l FASB No. 94 requires consolidation when parent has controlling interest

4 © Copyright Doug Hillman 2000 Reciprocal Accounts l Accounts in two separate sets of books that represent a common element and will cancel each other out l Investment on parents books and owners’ equity on subsidiaries l For intercompany transactions ›Accounts receivable and accounts payable ›Sales and cost of goods sold

5 © Copyright Doug Hillman 2000 Consolidating l Combine similar accounts from the separate financial statements of parent and subsidiary l Eliminate reciprocal accounts

6 © Copyright Doug Hillman 2000 Work Sheet for Consolidated Balance Sheet ParSubEliminConsol Cash Invest PPE Total Liab75580 CS RE Total

7 © Copyright Doug Hillman 2000 Worksheet for Consolidated Income Statement ParSubEliminConsol Sales CGS Op. Exp Total exp Net income

8 © Copyright Doug Hillman 2000 Acquisition of Less Than 100% of Subsidiary l Eliminating parent investment against subsidiary owners’ equity leaves some subsidiary owners’ equity l Minority interest ›Ownership interest of remaining owners in assets of subsidiary

9 © Copyright Doug Hillman 2000 Acquisition of 100% at More Than Book Value l Elimination of 100% of subsidiary’s owners’ equity against investment leaves a debit balance l Excess paid for investment over value of assets is goodwill l Goodwill amortized over useful life, not to exceed 40 years

10 © Copyright Doug Hillman 2000 Analyzing Information l For companies with goodwill, is amortization reasonable? l If majority owned company is not consolidated, what is impact? l For companies using equity method, how much cash dividends are actually being received?